What financial and non-financial information on intangibles is value-relevant? A review of the evidence

This paper evaluates what we have learned about the relevance and reliability of financial and non-financial information on intangibles from the value-relevance literature. Because value-relevance studies do not easily allow judgments about the reliability of information on intangibles, and this is an issue of central interest, this paper takes a rather wide look across a range of literatures to try to piece together some indirect evidence on both relevance and reliability. The evidence from a package of value-relevance and triangulation studies suggests research and development (R&D) is generally not reliably measured and may be less relevant in some contexts than others as well (e.g. established versus growth firms). Further purchased goodwill and some non-financial measures of brands and customer loyalty do not appear to be reliably measured. While a large number of financial and non-financial information is value-relevant, it is difficult to make categorical judgments about most other items, as differences in value-relevance could be due to different relevance or reliability, or both. Several rich areas for future research include designing direct tests of reliability, focusing on settings where intangibles are changing due to shocks, finding new economic benchmarks to test reliability, and studying the impact of accounting discretion and factors such as strategy and capabilities on value-relevance tests of information on intangibles. Two regulatory issues arising from this review paper are the gap in the reporting of separate line items of expenditures on intangibles; and the possibility that giving management discretion, with regulatory guidance, to report intangibles might facilitate more value-relevant information on intangibles.